Blackstone Mortgage Trust Inc (BXMT) 2022 Q3 法說會逐字稿

Good day, everyone, and welcome to the Blackstone Mortgage Trust Third Quarter 2022 Investor Call hosted by Weston Tucker, Head of Investor Relations. My name is Ben, and I'm (inaudible). During the presentation, your lines will remain on listen-only. (Operator Instructions) I'd like to advise all parties that this conference is being recorded for replay purposes. And now I would like to hand it over to your host. Weston, the ground is yours.

Great. Thanks, Ben, and good morning, and welcome to Blackstone Mortgage Trust's Third Quarter Conference Call. I'm joined today by Mike Nash, Executive Chairman; Katie Keenan, Chief Executive Officer; Austin Pena, Executive Vice President, Investment; Tony Marone, Chief Financial Officer; and Tim Hayes, Shareholder Relations. This morning, we filed our 10-Q and issued a press release with a presentation of our results, which are available on our website and have been filed with the SEC. I'd like to remind everyone that today's call may include forward-looking statements, which are uncertain and outside of the company's control. Actual results may differ materially. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our most recent 10-K. 

We do not undertake any duty to update forward-looking statements. We will also refer to certain non-GAAP measures on this call. And for reconciliations, you should refer to the press release and our 10-Q. This audiocast is the copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent. So for the third quarter, we reported GAAP net income per share of $0.60, while distributable earnings were $0.71 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the third quarter. If you have any questions following today's call, please let Tim or me know. And with that, I'll now turn things over to Katie.

Thanks, Weston. The capital markets today reflect significantly heightened uncertainty around global economic conditions. But on the ground, BXMT's fundamental performance this quarter once again underscores the stability, resilience, and earnings power of our business. We have always run this company according to our core principles, low leverage, strong borrowers, and high-quality real estate backed by a conservatively structured match-funded balance sheet.

The importance of these principles is most apparent in environments like the one we face today. So most institutional real estate owners expected higher rates to come. The speed and slope of the rate hikes have been more aggressive than anticipated. But given the key tenets with which we originated our loans, they are well positioned to withstand the impact of higher rates. At the same time, the growing earnings power across our entire portfolio provides a powerful ballast amid an evolving credit backdrop. 

This quarter, we generated $0.71 of distributable earnings, up an impressive 13% year-over-year. Our retained earnings grew book value even as we increased our reserves, and we drove these robust results while maintaining $1.7 billion of liquidity, more than double our March 2020 level. We entered the fourth quarter strategically positioned to play offense in a highly opportunistic investment environment while continuing to generate attractive durable income for our shareholders. The current market reflects a lack of visibility on the pace of interest rate hikes and where they will settle long term. As a result, asset prices are volatile, impacting liquidity and restraining investment activities.

And while the public markets are more reactive to this day-to-day uncertainty, what matters for real estate over time is fundamental performance, high-quality real estate that can capture rent growth is resilient in inflationary environments as replacement cost rises and cash flows outpaced higher OpEx and rates. There is nearly $400 billion of institutional real estate capital sitting on the sidelines. And while it will take time, as the rate picture crystallizes, liquidity will flow back to hard assets that generate attractive yields. 

If long-term rates settle out in the range of their current levels, some asset values will need to reset. But unlike the GFC, there is neither overleveraged nor overbuilding weighing on the system, and most reasonably levered capital structures will be able to absorb a reset in rates with an impact to the equity returns, but still a positive outcome for the debt. This quarter, we saw once again that the BXMT portfolio is weathering the capital market storm. A result of the low basis at which we start our senior loans, our credit selection process, our rigorous loan structuring, and our sponsorship.

We continue to see that the value-add business plans we lend against can capture increasing rents in an inflationary environment, which should support asset values and credit performance over time. Moreover, 96% of the loans in our portfolio have rate caps, which insulate borrowers from further rate increases or other structural enhancements, including carrying guarantees or substantial interest reserves. 

The result is our continued 100% interest collection despite a 300 basis point increase in SOFR since the beginning of the year. While our positive experience to date is an important indicator, as a lender, we naturally consider many scenarios, including the potential for conditions to further deteriorate. In this respect, we look to the position and incentives of our borrowers. With an average loan LTV of 64% at origination, our sponsors have 36 points of equity to protect as a starting point.

Even in a materially higher rate scenario, the incremental carry costs borne by borrowers represent a small fraction of the overall deal capitalization, just 1 to 2 points of additional equity a year, well within our sponsor's capabilities and justified for assets with value to protect over the long term. This commitment is reflected in the behavior we saw in the pandemic when our sponsors injected over $0.5 billion of additional cash to carry their assets. And we see analogous behavior today with our sponsors having invested $275 million of incremental cash equity so far this year. 

Turning to the office sector. While the office segment faces secular headwinds, it is further impacted today by regulatory pressure at banks and a broad brush approach typical in periods of economic pullback. There are many older vintage commodity office buildings that will suffer. But there is also a significant segment of the institutional market where the high-quality office is seeing continued kind of demand and print growth.

For example, this quarter saw New York City's strongest leasing activity since COVID, up 28% year-over-year and roughly 10% above the third quarter '19 and the 5-year pre-COVID average. And that leasing activity is concentrated in Class A building, which despite being only 1/3 of New York City's stock captured 74% of leasing in the third quarter. In most of our office portfolio, we see stable occupancy, ongoing sponsor commitment, and particularly notable in today's environment, continued repayments with $349 million in office loans repaying over the last 3 months, including a vacant New York City office slated for renovation, which just occurred post quarter end. 

Our office portfolio is 92% Class A, 100% performing, and generally characterized by high-quality, well-amenitized buildings that are outperforming in today's leasing environment. A 1/3 of our collateral is brand-new construction, including the new build headquarters of Pfizer and Warner Bros. And across our portfolio, we have assets recently leased to major law firms and creative users, private equity finance, and tax. We lend to highly experienced, well-capitalized sponsors like Kishnspire, Oaktree-related, and JPMorgan.

And this year, our borrowers have contributed over $150 million of new incremental equity to our office deals alone, indicative of the value they have to protect and their continued commitment to the assets. While we believe the vast majority of our office portfolio is well-positioned for the post-COVID environment, we downgraded 4 office loans to 4s this quarter. These loans, which represent just 3% of our portfolio, continue to perform, pay interest, and, in most cases, show positive leasing and material recent sponsor cash commitments. 

But having evaluated each asset in our portfolio in detail, we felt downgrades were warranted in these specific cases, denoting a heightened risk of underperformance. We remain focused on actively managing these loans as well as our broader office portfolio in this more liquid environment. Importantly, the overall performance of our collateral assets across the portfolio continues to show strength. We also had upgrades this quarter as assets ramped up and stabilized. With higher rates and less overall transaction activity in the market, assets that have completed their business plans are staying in our portfolio longer as patient sponsors opt to hold rather than sell into the current conditions.

We are also keeping a close eye on Europe and the U.K. in light of rising inflation, elevated energy costs, and increasing economic uncertainty. Our underwriting process is consistent across borders. Just as in the U.S., we have been highly selective about sponsorship, real estate quality, and credit in our European lending practices. Our collateral is concentrated in high-conviction sectors, and in many cases, the LTVs on these loans are lower relative to similar U.S. transactions.

And just as in the U.S., we have seen strong, consistent credit performance in our Europe book. Notwithstanding the macro challenges, the dislocation in Europe today is presenting appealing investment opportunities. This quarter, our primary origination activities were in cross-diversified pools of European industrial where vacancy is 1.5%, and the rent growth is nearly 20%. Our overall originations this quarter averaged 58% LTV and an all-in yield of 541 over base rates, a high single-digit all-in unlevered return. 

With the securitization market frozen and banks seeking to reduce their balance sheet exposure, we expect a target-rich environment in the U.S. as well. While regular way transaction flow is more limited, given the disconnect between buyers and sellers on valuations, we are starting to see both recapitalizations at reset basis and secondary loan purchase opportunities where we can partner with motivated counterparties to provide liquidity at compelling risk-adjusted returns. Going forward, we expect an increasingly attractive investment environment, and we are fortunate to have ample dry powder to address it. Turning to the balance sheet. Our liquidity risk management approach and diversification put us on solid footing to address this more volatile but opportunistic environment. 

Our robust liquidity position today is by design. The result of our actions early in 2022, when seeing hints of dislocation in other corners of the market, we opted to fortify our capital base and slow regular way originations to best position ourselves for what we thought ahead. And from the outset of our business, we have run a matched balance sheet, insulating our performance from term, currency, and interest rate risk.

We have diversified sources of corporate and asset-level capital, a material advantage in an environment where much of the market is sidelined. As a premier investor and one of the largest owners of real estate in the world, Blackstone is a trusted partner of the banks. Our track record as a borrower affords us best-in-class terms throughout our business and helps us to secure lending capital as banks consolidate business to their top clients, including a new GBP 1 billion credit facility just this quarter. 

Looking ahead much depends on the sales management of the delicate balance between inflation and recession. But our navigation of this turbulent market is deeply informed by the unparalleled investment experience and knowledge base of the Blackstone platform, which has a long history of performing for investors through cycles. BXMT's track record, including the last period of severe dislocation in 2020 through today evidences the results of our positioning, stable, asset and liability performance, and highly attractive earnings growth that is rare in today's market. With a floating rate portfolio, our income is still growing. 

The third quarter average SOFR was 2.45, and it is already 120 basis points higher at 365 today. For our asset-sensitive portfolio, each incremental 100 basis point increase in rates results in $0.06 of increased earnings quarterly, all else equal. This powerful earnings dynamic creates meaningful resilience for our business in 2 ways: first, building book value, which helps insulate against increasing reserves or potential credit issues, and second, ensuring our dividend remains well covered in a wide range of scenarios. Together, these elements strongly support our ability to deliver a reliable overall return to our shareholders, even if credit conditions weaken.

Today, BXMT is trading at roughly 80% of book value, 8.5x P/E, and a 10.3% dividend yield. Metrics that we do not believe reflect the resilience of our business model and earnings stream, our long-term credit track record, or the clear differentiation of the Blackstone real estate platform. Our current dividend yield is 620 basis points above the tenure, well wide of our pre-Covid average, despite our company now having growing earnings, significantly stronger dividend coverage, a high integrity balance sheet with more than double the liquidity, and a performing portfolio that has been reoriented to stand up to today's inflationary pressures. 

Less than 10% of U.S. stocks today offer yields above the 10-year treasury rate, and we are paying a dividend yield that is more than 2.5x that level. We've paid that dividend for 29 consecutive quarters, and we're covering at over 115% today. In a volatile market, current income is key, and BXMT is delivering. With that, I'll turn it over to Tony.

Thank you, Katie, and good morning, everyone. This quarter's results showcased the positive impact of rising rates on BXMT's floating rate loan portfolio with another consecutive quarter of meaningful earnings growth, supported by the stability in our book value, portfolio metrics, and capitalization. We reported a GAAP net income of $0.60 per share and distributable earnings of $0.71, which is up $0.04 from 2Q and $0.09 or 15% from 1Q levels.

This reflects the positive impact of rising base rates on our 99% performing loan portfolio continuing to flow through to our bottom line net income. As central banks continue to battle inflation, the market continues to further -- to forecast further increases in base rates, which will similarly provide a tailwind to BXMT's earnings. Comparing to 3Q levels, an incremental 100 basis point increase in base rates would generate $0.06 of quarterly earnings per share net of incentive fees, assuming all else is equal. 

Similar to Q2, our earnings this quarter had no meaningful prepayment income as overall market transaction volume has been muted, and we collected $443 million of repayments across our portfolio. This compares to $697 million of loan funding, leading to a consistent overall portfolio size of $26 billion and therefore, stability in our capital deployed and net interest income generation. As Katie noted, our portfolio of credit remains strong with no new impairments or nonaccrual loans and a net $937 million of loans upgraded with 10 risk rating upgrades this quarter outpacing 5 downgrades.

Overall, our total portfolio is currently 89% risk-rated 1, 2, or 3, which reflects the overall strength and stability of our borrowers and collateral assets. We increased our CECL loan loss reserve by $0.07 per share this quarter and $0.13 year-to-date, which amount does not include any specific loan reserves but rather is reflective of uncertainty in the broader economy and the related potential impact on our loan portfolio over time as required by the CECL accounting rules. 

While our CECL reserve does not impact distributable earnings, it does reduce our GAAP net income and book value per share. Notwithstanding this impact, our book value was still up slightly this quarter to $27.20 as our earnings more than covered our dividend, adding $0.10 to book value. Importantly, excess earnings will grow book value, benefiting our stockholders and offsetting the impact of higher reserves. In addition, in a period when the pound declined by 17%, and the euro declined by 14%, we saw virtually no impact on our book value as our local currency financing and programmatic foreign currency hedging offset the asset-level currency volatility. Although transaction volume was muted this quarter as new lending activity declined generally across the market, we did close $438 million of new loans at lower-than-average LTVs and above-average spreads. 

Consistent with our focus on the balance sheet and liquidity management, we obtained committed financing for substantially all of the $697 million we funded under new and existing loans this quarter. This is evidence that although we have seen banks pull back amid the choppy market conditions, we remain a favorite client with our track record of strong, consistent performance in our portfolio of high-quality, low-leverage assets. Importantly, we have maintained and, in many cases, strengthened the resiliency of our credit facilities to market downturns. Looking at our total financings outstanding, 64% is either structurally immune from any market provision -- mark-to-market provisions or is limited to margin calls on defaulted assets only, with no capital markets margin call provisions on any of our financing. 

With the strong credit performance of our loan portfolio and the stability of our capital structure, we will receive 0 margin calls in the history of BXMT, including during the challenging market conditions experienced at the peak of the pandemic in 2020. We maintain a term-matched asset-level financing structure and have no material corporate debt maturities until 2026, giving us a very stable platform from which to manage our business through more volatile market conditions. Further, we increased liquidity to a record $1.7 billion and nearly a 60% increase from this time last year, giving us capital to deploy opportunistically or reserve to defend our assets should market conditions worsen. In closing, we are pleased to report another quarter of earnings growth driven by rising rates with the prospect for further growth as this trend continues. 

We have also considered potential downside scenarios should further rate increases or other market factors lead to any nonperformance in our portfolio. Although there is a broad range of potential outcomes given the current market conditions, we believe our superior credit selection and fortified balance sheet will endure, and our strong earnings will continue to provide clear support for our book value and quarterly dividend. In periods of high inflation, we believe that the value generated for investors by dividend income becomes increasingly important, and we look forward to continuing our track record of a reliable and attractive dividend through varied market conditions. With that, I'll ask the operator to open the call to questions.

Thank you. Allow me to inform our audience. (Operator Instructions) Our first question comes from Donald Fandetti from Wells Fargo.

Katie, the 4 office loans that moved to rating, I believe. Can you talk a little bit about the quality of the sponsor? And did they have -- is their view that there's enough equity in the properties? Because I think that's one of the risk in this environment is that values have gone down. So I think you could see property owners more likely to walk away from an asset.

Sure. Thanks, Don. So we downgraded 4 loans to 4 this quarter, just 3% of the portfolio, and determined the downgrades were warranted, I think, given the unique headwinds each of the assets faces. In some cases, locations in more challenged markets or submarkets like D.C. or Chicago as well as looking at the specific circumstances. I think it is important to note, as I mentioned on the call, all of the assets have had recent sponsored cash commitments, some very material.

And so these really are assets that not underperformance, but where posters are still investing capital and where we don't expect -- we're not looking at impairments, that would be a 5 rating. I think it's also worth noting we've had 8 4-rated loans since COVID and all have been performing consistently for a 2-year period. One actually repaid this quarter. So when we look at our 4 rated loans, we're looking at an increased risk of underperformance. We're looking at our underwriting, what we're seeing in the market, but we do still have committed sponsors in most cases, and we're working towards either repayments or sales to get these assets moving on.

Okay. And then my follow-up is just on net portfolio growth. Is this sort of an environment where it's all about defense, there's not going to be much growth? Or do you still plan on growing the portfolio?

I think as we look at the investment environment today, there's a lot of really interesting opportunities. But really, we're in the very fortunate position of having a well-invested portfolio that's creating tremendous earnings power and delivering very strong current income. So we're going to have a very high bar for new investments. We obviously are looking at them. But I think that we should expect a strong well-invested portfolio going forward, but more consistency. And consistency between originations and repayments to keep that earnings power very stable.

Our second question comes from Doug Harter from Crédit Suisse.

You've been talking about office. Can you talk about your willingness or your appetite to look at new office loans and whether you would find any new opportunities attractive?

Sure. I think it's going to start from our overall perspective on the market today, which, as I mentioned, is definitely a high bar, and thinking a lot about underwriting debt service coverage, near, medium, long term, and uses for our capital in more interesting ways, i.e., legacy loan acquisitions, helping the banks reduce some of their exposures, those types of unique opportunities that we think can generate really outsized risk-return profiles. In the office market, generally, I think we've been very consistent in that we really see a very strong bifurcation in the market. So new builds are well positioned in markets with dynamic tenant demand, pre-leasing, and things like that. We would certainly look at opportunities like that. And we really see that as a different part of the market than the segment that is the most challenging.

And then just to follow up on your comment about legacy loan acquisitions. I guess just how do you kind of get comfortable with someone else's underwriting and just kind of the quality of loans versus something that you've underwritten from the start?

Sure. I think this is where the Blackstone platform really shines. I mean, we have incredibly detailed and up-to-the-minute real-time information on what's going on in markets. We have a great origination team. This business was really born in a period where there were a lot of loan portfolio acquisitions, the GE portfolio acquisition was really formative for the BXMT business generally. And we have, I think, a great capacity to put a slot team of really talented people to sort of crawl all over our loan portfolios and get a sense of how we view the underwriting in today's environment and really look at the structure of the documentation and all of that, I think it's something we've done successfully over time, and we're really well positioned today, both from a team and platform information perspective as well as our relationships with potential counterparties that might be looking for liquidity.

Our next question comes from Steve Delaney from JMP Securities.

Congrats on a nice quarter and a very volatile market. Katy, I'd like to ask about repayments. Obviously, things have slowed down, but it works out the $40-some million worked out to about 7% annualized on the portfolio. How should we think about that going forward? Normally, we would think a bridge loan portfolio would be, what, 20%, 20%, 30% a year in terms of runoff. So just your repay outlook.

Yes, absolutely. I mean, I think that with the way the transaction market is today and looking at all of the factors, we definitely expect overall transaction volumes to come down, and that's on the origination side and the repayment side. With the transaction market cooling, some of the deals that would ordinarily have repaid are sticking around longer. In a lot of cases, that's because patient sponsors are doing their sort of hold versus sell analysis, and they just like the hold size better. I think you can see that in our risk ratings. We have more ones and 2 today as a percentage than is typical. And in other cases, we're going to have situations where people need a little bit more time to execute their business plans.

And because of the way we structure our loan, that's really a great opportunity for us to get more equity in the door to support the business plans, reduce our loan, et cetera. And so I think over time, we'll see a little more portfolio. But most importantly, as we talked about earlier, the earnings power is really dictated by the investment level and the deployment of the portfolio. And so, a more stable portfolio is positive from an earnings perspective.

For sure. And those extensions that you have, in addition to getting more cash in from the borrower, do you have a repricing opportunity at that time as well in some cases?

Yes, we do, potentially. And I think that we really look at all of those conversations as new investment decisions where we think very carefully about the balance of pricing, term structure, new equity coming in, and really they bring to bear what I think is a very sophisticated asset management approach and new information, new underwriting to make sure that we're creating the most value that we can for our shareholders.

The following question comes from Eric Hagen from BTIG.

Can you guys talk about the sensitivity of cap rates in the portfolio to rising interest rates and how you see that developing, especially at the short end of the curve, and the sensitivity that you see there?

Sure. So I think when we think about the rate sensitivity at the short end of the curve, we really look at debt service coverage and the performance of our portfolio. As I mentioned in the remarks, 96% of our loans have either interest rate caps or other very meaningful structural enhancements like carrying guarantees. So I think as far as the short end, it's not going to have a material impact on our borrowers' ability to pay because there really is a lot of structural enhancement already built into the loans. As we think about cap rates over time, I think it really depends on a number of factors. Obviously, cap rates are related to interest rates. They're also related to growth in the portfolio, and growth in NOI.

And we're seeing continued NOI growth in the asset sectors that we've been focused on. Inflation-protected sectors like multifamily, hospitality, industrial, things with short-duration leases, and even very high-quality office are seeing very strong rent growth. And so, looking at cap rates in the context of growing NOI, obviously, values will be impacted more so by cap rates going up than if we just had NOI growth. But there's a balance between NOI growth and cap rates. And that's what we really use when we look at the long-term values of our assets, think about the risk in the portfolio, and think about new originations.

Our next question comes from Jade Rahmani from KBW.

The upcoming portfolio loan maturities. Can you speak to that? What do you have expected for the fourth quarter in 2023? And how much of that is office? Does it resemble the overall portfolio mix? Or is there any weighting toward office?

Sure. So I think worth noting when you look at the upcoming loan maturities. They're really pretty minimal. It's about 7% of the portfolio over through the end of 2023. So as we've talked about in past years, most of our loans, we kind of addressed them well ahead, whether it's because borrowers are executing their business plans and moving on or we think about other ways to have borrowers recommit to their assets.

So we don't see upcoming maturities as sort of a very heavy schedule. I would say, as far as the specifics, there's a lot of loans that already have plans in place for refi or sale. And on the others, I would refer back to the remarks I made a bit earlier as far as the approach we take with borrowers. In general, we really are willing to reward patient borrowers. We're interested in putting more capital in the deals, and that's what we've seen by and large.

Made a construction loan $670 million on looks like a Class A potential development in downtown Austin. Can you confirm that, that's the case? And would that be a fourth-quarter origination? Given it's construction, I wouldn't assume there's a large amount of upfront funding there.

Yes. That was actually a second-quarter origination. I think the trade picked it up a little later on versus the origination. But we love that project. That is really going to be a best-in-class asset. And I think it really speaks to our broader focus on the flight to quality. We think that the best assets well located are going to outperform, whether it's an office or multifamily, or hotel of that project is a mixed-use project.

It's also a low-leverage construction loan with one of the best sponsors in our portfolio. So overall, looking at those types of opportunities where we have the opportunity to lend at a low leverage level on the newest best quality in the market, we like to see those. But again, that was the second-quarter deal. And I think we talked about it a bit on the second quarter call for more detail.

Our final question comes from Stephen Laws from Raymond James.

Katy, I'd like to start first with maybe how conversations with counterparties, particularly around the fired loan, didn't change. So maybe the 4-rated bucket. When we see 4 loans with rating changes, that's an internal metric. How are your current conversations going with your counterparties around credit marks? How are they looking at watch-list-type assets, specifically around the office? Kind of any discussions with what you're seeing with -- in those discussions.

Yes. I think we maintain a really open and active dialogue with all of our lenders, and they're very involved, and as just being on everything that's going on in the portfolio in real time. I think, in general, when you look at our lenders, we have great long-term relationships with them. They trust us to manage the portfolios in the best possible way. They have really well-performing portfolios. And of course, they look at our overall business and we have more income and more liquidity than we've really ever had. And that gives them a strong degree of confidence in us as a borrower and a counterparty. So I really have not seen any material change in terms of our dialogue with our lenders.

And then, as a follow-up, I appreciate the disclosure and commentary around rate caps and structural protection, effectively all of the portfolios. But can you talk in a little bit more detail there? Where is the weighted average on those weights recaps, how much are in the money, new originations? Where are you putting those in? And is it a different level than where those were going into loans as far as a spread basis a year or 2 ago? Any additional color you can provide on the details?

Sure. So starting with new originations, we have always adhered to a policy rate cap on our loans. We're very focused on making sure that we involve a sort of up-to-the-minute structure on the loans that we originate. And that's really been a consistent touchstone of our origination approach over the years and, obviously, the same today. I think the rate caps we have in the portfolio, we are seeing more and more of them in the money. They obviously come in at different levels.

But I think the credit performance and the interest collection we've seen in the portfolio is an indication of the fact that our structures are working. And we continue to have the rate cap roll. When loans come upon maturity or interim maturity, borrowers need to buy new rate caps, and we're seeing other equity come in with more interest reserves and more structural protection. So I think that that part of the structure is sort of a key difference in terms of how lenders can weather an environment like this and something that we've been very focused on in our portfolio.

Thank you. And now, (inaudible) hand it back to Weston Tucker for closing remarks.

Thanks, everyone, for joining us today, and I look forward to following up after the call. Thank you.

Thank you for joining, everyone. That concludes your conference. You may now disconnect. Please enjoy the rest of your day. Goodbye.